Autumn Statement 2022: Jeremy Hunt admits UK ‘is now in recession’, outlines measures to close £55bn fiscal hole

Chancellor Jeremy Hunt has announced £55bn of tax hikes and public spending cuts in an Autumn Budget geared at appeasing the financial markets, with some measures on public spending pushed back until after the next General Election.

The Chancellor also admitted that the UK economy is in recession and described the Budget as promoting “stability, growth and public services while protecting the most vulnerable” and identified inflation as “the number one enemy”.

“With a £55bn black hole to plug, there was little to cheer for businesses and individuals today, as the Chancellor delivered a statement in complete contrast to that of his predecessor,” Karen Campbell-Williams, head of tax at Grant Thornton UK, said.

“This was a Budget where the stated priorities were stability, public services and growth – whilst there was much to support the first two of these, tax incentives for growth were light on the ground.”

Hunt’s statement follows the news that UK inflation hit 11.1% in the year to October – representing a 41-year high.

In its fiscal outlook, the Office for Budget Responsibility (OBR), said it now expects inflation to level out at 9.1% for the remainder of this year before falling to 7.4% in 2023. Inflationary pressures are being driven by a myriad of factors, but in particular, the war in Ukraine, which has led to an eight-fold increase in energy prices, the OBR said in a statement.

UK Government borrowing is estimated to reach £177bn this year, with that figure reduced to £144bn next year, before falling to around £69bn by 2027-28.

Overall, this year the OBR forecasts that UK GDP will grow by 4.2% but fall by -1.4% in 2023.

“In reaction to the UK’s Autumn Statement we’ve initially seen bond yields move higher and sterling sell off as the OBR’s new UK GDP forecast for 2023 was updated to -1.4%, which is a hefty revision from +1.8% previously,” said Mike Owens, senior sales trader at Saxo UK.

“The broad take is that both gilts and the pound have staged a meaningful recovery in the first few weeks of the Sunak government. Today’s announcement of the Autumn Statement, which is fiscally prudent but nevertheless paints a bleak picture of the state of the UK economy, gives markets an excuse to take a little bit off the table.”
He added that while the Budget brought plenty of tax reforms in areas like windfall taxes on the oil and gas sector and electricity generators, which were broadly in line with expectations, share prices of energy companies like SSE, Centrica, National Grid and Drax slipped in early reaction to the news.

Tax increases

The Budget saw Hunt increase the windfall profits levy on energy producers from 25% to 35% as of January 1 2023 to run until March 2028, as well as announcing a 45% temporary levy on electricity generators, which will raise £14bn in revenue for the government next year.

Meanwhile, widely expected stealth taxes, which will see thresholds and allowances on personal income tax, NICs and inheritance tax frozen, were introduced in a move that could exacerbate the cost-of-living crisis.

The Chancellor announced a decrease in the personal tax threshold for higher earners paying 45% percent to £125,000 from £150,000 at present, and the halving of the Capital Gains Tax threshold.

“The rise in dividend tax was already confirmed but reducing the tax-free allowance is a double blow,” Sam Newton, co-founder at Gravitate Accounting, said. “As for income tax, the removal of the additional rate of tax, which brings it in at a far lower rate, is a worrying inconsistency and makes it harder to trust there is a true plan.”

“Cuts were always going to be required and the government has masked some of the effects by announcing freezes. However, in real terms, this is a tax cut, especially now inflation exceeds 10%. Freezing these rates over a five-year period will have a significant impact on individuals, especially as we get into the latter years,” he added.

An unexpected tax rise for consumers came in the form of a duty on electric vehicles, which kicks in in 2025, but stamp duty cuts, announced by the Truss administration, will stay in place until 2025

The Chancellor also announced plans to ensure multinational corporations – including big tech – “pay the right tax in the countries where they operate”, which alongside further measures to tackle tax avoidance and evasion will raise an additional £2.8bn by 2027/28.

Energy, infrastructure and innovation

The Government’s plans to push back any public sector funding cuts were highlighted in the Chancellor’s decision to delay any freezes in capital spending for another two years.

The Chancellor stressed a commitment to “UK energy independence and to growing the renewables sector”. This will include a focus on nuclear energy with plans for the new nuclear power plant at Sizewell given the go-ahead.

He described road, rail, 5G and broadband as “second growth priorities” and announced that both the HS2 link to Manchester and Northern Powerhouse projects would also go ahead as planned, illustrating the government’s commitment to its ”levelling up” agenda.

Science, technology and innovation were also given the thumbs up by Hunt who said that he would aim to turn “innovations into companies” and challenge monopolies. The entire R&D budget will be protected to promote science, innovation and technology, and plans for investment zones, would be centred around universities, he said.

Cost of living

As expected, there was support for the “most vulnerable” with both pensions and benefits continuing to rise in line with inflation and the Pensions Triple Lock protected.  The national living wage is also increasing to £10.42 per hour.

However, most UK households are expected to see a squeeze on their finances as a result of an increase in the energy price guarantee from £2,500 to £3,000 next April.

Energy cost support packages for businesses will not be announced until next April.

“With tax hikes and spending cuts leading the agenda, today’s budget marks a stark return to austerity to an extent not seen since the aftermath of the 2008 global financial crisis. To calm the markets, the overarching sentiment of Chancellor Jeremy Hunt’s statement was that the UK now intends to live within its means, without stifling growth,” said Giles Coghlan, chief market analyst at HYMC.

“As Hunt ushers out the era of Trussonomics, which tried to stimulate the economy too quickly, there is an equal and opposite risk that the Chancellor depresses the economy too quickly, which could cause yet more economic and political upheaval. Hunt tried to deliver a statement that avoids both extremes. On balance, this was as good as it could have been.”

He added that sterling had sold off initially on the OBR’s projections for GDP to not return to growth until 2024, but that the reaction was marginal.

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